Tax Implications In Divorce Financial Planning Flashcards
When is marital status determined for taxes?
last day of the tax year
When is the couple considered divorced for tax purposes?
- Final Divorce decree is issued
- There is a legal separation under local law requiring couple to live apart
OR - Married individual qualifies as abandoned spouse (Section 7703b)
What is the abandoned spouse tax section?
Section 7703b
Abandoned Spouse Requirements
When all conditions are met:
1. Abandoned spouse pays more than half costs of maintaining their household for the tax year
2. Individual files separate tax return
3. Individual’s household is the principal home of a dependent child for 6 or more months of the tax year and individual is entitled to claim the dependency exemption
4. Individual lives in separate residence from spouse longer than 6 months of tax year
How to qualify as Head of Household (HOH)
3 Requirements:
- Taxpayer NOT married or legally separated and hasn’t lived with spouse for last 6 months of the year
- Taxpayer pays more than half of household
- Taxpayer child qualified as dependent and lives with taxpayer more than half the year
After Divorce, what are your filing options?
NOT MARRIED
Can file as single or head of household (HOH)
Legal Separation
When spouses go to court and set terms under which they will live separately
They aren’t considered married for tax purposes but CAN’T remarry
It is not common
How are income and deductions calculated in year divorce is final in equitable distribution state?
Income taxable to person that earned it and income from property taxable to property owner as determined by state law
If jointly owned, income taxed 50% to each spouse according to ownership proportion
How are income and deductions calculated in year divorce is final in community property state?
TWIN CAN LAW
Former spouses report their share of community income up until the divorce is final (split in half for tax purposes), and report separate income from date the divorce is final through last day of tax year
Exceptions to Community Property Rules
- All conditions must be met to treat community property as separate
- Legally married spouses live apart at all times during year
- Didn’t file joint return
- No portion of income is transferred between spouses during tax year
- If spouse fails to include because they didn’t know (joint income not filed- they had no knowledge)
- IRS can deny community treatment to spouses who didn’t notify other spouse about all their income
Innocent Spouse Rule
Relief from liability for spouse that signed joint tax return and has no knowledge of understanding of tax
Most useful when one spouse is self-employed
Section 6015
Qualifying for Innocent Spouse Rule
- Joint return was filed
- Understatement of tax attributing to erroneous items from one spouse
- In signing return they didn’t know and had no reason to know
- It would be inequitable to hold responsible
- Innocent spouse elects no later than 2 years after collecting starts
Depreciation Recapture
The owner may elect to deduct the cost (expense) of certain types of trade or business property in the year the property is purchased
Subject to certain limitations based upon the cost of the property and trade or business income
IRC 179
IRC 72 T 2 C
Section of the IRS Code allows the alternate payee to receive money from qualified plan, pursuant to a QDRO, without having to pay a 10% tax penalty
The distribution would still be subject to ordinary income tax and the custodian must withhold 20%
AMT Allocation Rules
AMT does not have a rule of allocation between spouses
Who can Head of Household claim for exemptions?
Themselves and their children
Least Likely Way to Settle Up Offsetting Value of a Business
Regarding offsetting value of a business, it is least likely to settle up when business is sold at retirement. There is too much uncertainty
Interest Paid on a Settlement Note
Are deductible by the payor
Taxable Income Calculation
Gross wages
- 401k contribution
- taxes
- mortgage interest
- charity
Income Tax Calculation
(Taxable Income - amount over tax rate) x tax rate + additional tax
Refer to tax tables
Not itemized deductions
401k contributions
Not included in net-take home pay
401k contributions and savings bonds purchases
Least likely expense to be double counted
Mortgage payments
Added back to net income to calculate take home pay
401k contribution
